The recent market sell-off was most pronounced in lower quality, more economically sensitive areas of the market, such as energy, materials, financials, industrial manufacturing and travel related businesses (i.e., airlines, cruise operators, etc.), which are areas where we find an extremely limited number of investible businesses.
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No two crises are exactly the same, but past crises can help you learn, improve and gain confidence in the processes you employ when you face the next one.
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Last week was another momentous one for economies and markets, with particular attention being paid to the economic recovery in China, earnings season for U.S. stocks, and the Federal Reserve’s views on interest rates. Below, my colleagues from the Global Market Strategy Office and I answer some of the most pressing questions we have received from clients in recent days:
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Earnings season is heating up in earnest, giving investors a clear glimpse into the economic impact of the global lockdowns designed to slow the spread of the coronavirus. While investors brace themselves for bleak business results, we are so glad to see that these lockdowns appear to be working as intended from a public health perspective – many countries show evidence of “flattening the curve” of infections and fatalities. This is leading to the inevitable conversations of how best to re-open economies – a task that will require caution so as not to overwhelm health care resources with a second wave of infections.
With all of this as background, our portfolio managers continue to look for ways to guard against the looming risks and to position themselves to find opportunities in the recovery – no matter what path that might take. In this blog, I highlight the perspectives of four Invesco investment experts:
The COVID-19 global outbreak that started in early January represents an exogenous shock to the global growth cycle, at a time when the world economy was on the cusp of a new synchronized cyclical recovery. Driven by this shock, our macro framework moved into a global contraction regime in February (i.e., global growth expected to be below trend and decelerate).
This regime remains in place today and is broad-based across regions (Exhibit 1). Furthermore, given the increased severity of the lockdown and quarantine measures undertaken by governments around the world, it is highly likely that most, if not all, countries and regions will experience a significant recession in the first half of 2020. Therefore, we expect the economic data to deteriorate meaningfully over the next few months.
At this stage it is difficult to determine how long this macro environment will persist. Historically, contraction regimes in our framework have lasted on average six months with wide dispersions, ranging between two and 15 months across all episodes since the 1970s. We will continue to follow the data and the framework as it runs its course, but it is nonetheless valuable to compare the current downturn to recent episodes of financial turmoil, despite meaningful differences in the source of the shock and market imbalances.
A great deal of news has been announced over the last week, and it can be difficult to determine what’s the most meaningful for markets. Here are the items I’m focused on this week.
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Given the high level of volatility and the recent market selloffs, we thought it would be helpful to provide our perspective on what we have seen in Global Equity markets in February, March, impact on portfolio and what our outlook is.
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The spread of COVID-19 has created unprecedented market turmoil. While the equity space garners the most headline attention, it’s been a very volatile time for the fixed income markets, particularly within the investment-grade space. In fact, over the last few weeks, we’ve witnessed six out of the 10 largest one-day moves in history.
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In the early stages of the COVID-19 pandemic, we talked about the need for an effective, global, three-pronged approach in order to achieve a “best-case scenario” outcome: 1) an appropriate health policy response to “flatten the curve” and control the spread of the virus; 2) an adequate monetary policy response to support financial markets and the economy; and 3) an adequate fiscal policy response to help soften the economic blow to households and businesses. We saw effective approaches, in different forms, in both China and South Korea. Now we are looking to other policymakers to provide effective strategies as the novel coronavirus spreads.
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Two developments last week suggest that we have entered a period of improved economic policy certainty. Both the UK election and the US-China Phase 1 trade deal promise to bring far more clarity for businesses as they plan for 2020 and beyond. If so, this could be a welcome gift for the economy and the stock market as we enter the holiday season.
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How much of a surprise was Thursday’s UK election outcome? Actually, it was very similar to the seat-by-seat projections we published a month ago, which forecast a clear Conservative majority in Parliament. The difference is that the Conservative Party won a few more seats than we expected (365), as did Labour (203), and the Liberal Democrats did much worse than we anticipated, taking 11 seats.
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I grew up in the New York City area in the 1980s. My dad always read the tabloids, and so I started to do so as well. That’s where I first learned about a fascinating phenomenon – the Guardian Angels. This was a large group of concerned citizens who wore distinctive uniforms, most notably red berets, and patrolled subways and other public areas in an attempt to prevent crimes from occurring during what was perceived to be a lawless time for New York City. In the beginning, the Guardian Angels were labeled by the tabloids as “vigilantes” who were “taking the law into their own hands.” Today, they are a reminder of how chaotic New York City was at that time.
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In my recent visit to China, I met with a variety of clients, as well as digital companies. In spite of the overhang of the U.S.-China trade wars, everyone I spoke with remained optimistic about the opportunity for further investment in this important market and broadly bullish in their long-term economic outlook.
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Welcome to December – just one more month until a new year begins (and, depending on how you do the math, a new decade as well). Naturally, this is the time when market-watchers issue their forecasts for what may lie ahead, and my team is no exception. Simply put, we expect continued monetary policy accommodation with little fiscal stimulus. Therefore, we are more optimistic about capital markets than we are about the overall economy, and we favor risk assets over non-risk assets for 2020. Below, I highlight some of the reasons why. An in-depth analysis is available here.
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Last week brought a number of key developments from central banks around the world, from the release of the Federal Reserve’s (Fed) latest meeting minutes, to a reaffirmation of the Bank of Canada’s (BOC) monetary policy, to the first speech from European Central Bank (ECB) President Christine Lagarde. These underscored the key differences between each central bank, but I see one constant: the continued pressure imposed by trade war tensions and a slowing global growth outlook.
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As yields across the globe plummet, many investors are now actually paying someone to take their money. Currently, there are more than US$12 trillion of bonds with negative yields outstanding which equal 24% of the global bond market.1 In Europe, the search for positive yield is especially challenging. Over half (51%) of the European bond market now yields a negative rate.1 Germany recently issued €5 billion of bunds at a price of €101.5, but these will only return €100 in two years with zero coupons paid.2 And according to Reuters, Austria is also rumoured to be planning to issue a 100-year bond at roughly 1% to feed yield-hungry investors.
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Market gyrations can make investors want to run, but history shows stocks’ ability to overcome these concerns
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As any parent of toddlers or teenagers knows, there’s often a big difference between what kids want (candy and a later bedtime) and what they need (vegetables and plenty of rest). I’m reminded of this as I anticipate this month’s Federal Reserve (Fed) meeting. A cut is widely expected — but what is the level that markets need, versus what they want?
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Economic policy uncertainty has for decades been recognized by economists as having the potential to negatively impact economic growth. In 2015, economists Huseyin Gulen and Mihai Ion found that economic policy uncertainty has a strong negative correlation to business investment.1 This built on previous research from the 1980s that showed that high uncertainty gives firms an incentive to delay investment decisions, especially in situations where reversing an investment decision can be costly.2
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The latest installment of the Brexit drama offers good and bad news for investors in U.K. assets and beyond: The good news is the risk of a “no deal” Brexit has receded, but the bad news is it’s still a possibility and the timeline toward resolution is now more extended. This means that persistent uncertainty is likely to continue to weigh on the U.K. and wider European economies, and may elevate the volatility of U.K. asset markets, particularly the currency.
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